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ICYMI: Student Body Left
The President wants everyone in college on Uncle Sam's dime

WASHINGTON, D.C. | November 9, 2011 -

As the default rate rises on federally backed student loans, President Obama has responded with a plan to make education lending even more expensive for taxpayers. That's hard to do, but he's determined.

In his first student-lending reform, which was rushed through the Senate as part of ObamaCare, Mr. Obama added $1 trillion to the federal balance sheet over the next decade by eliminating private lenders. Stage two, which he offered recently at the Denver campus of the University of Colorado, added easier repayment terms and debt forgiveness. Who says Uncle Sam is a scrooge?

Specifically, Mr. Obama wants to accelerate an "income-based repayment" option to forgive more student debt and limit monthly repayments for graduates earning low salaries. Thanks to the 2010 law, this change is already scheduled to take effect in 2014. But in Denver he said, "I'm here to announce that we're going to speed things up. We're going to make these changes work for students who are in college right now. We're going to put them into effect not three years from now, not two years from now—we're going to put them into effect next year."

It's good to be the King—even if it's not legal. The 2010 law clearly states that the new repayment option is "for new borrowers on and after July 1, 2014." GOP sources in the House and Senate tell us that the Administration can probably make these changes using the authority in a related program, but they doubt that the President can put them into effect next year.

That's because such changes cannot be enacted by executive order. They fall into a regulatory category in which "negotiated rulemaking" is required, meaning the government must convene a panel to consider the proposals. Given the various requirements for rule-writing and allowing for public comment, Capitol Hill staff say there's not enough time to put these rules in place by next school year.

Assuming the panel approves these rules eventually, they will cost taxpayers $575 million a year, according to the Congressional Budget Office's scoring of the 2010 law. Once in effect, borrowers will not have to pay more than 10% of their "discretionary income" each year, regardless of how much they owe. The government defines discretionary income as the difference between the borrower's adjusted gross income and 150% of the federal poverty line. If the money isn't completely paid back in 20 years, the remaining debt will be forgiven.

That's right. Wait 20 years and, presto, you're student debt-free.

Remember, student loans from the government are available regardless of credit history or assets, so default rates are high and have been rising—to 8.8%, according to the most recent government data. Add the possibility that people can choose or end up in occupations that pay low salaries, and the taxpayer loses again. A student who finances an expensive education and then pursues a career with meager salaries could be sticking taxpayers with five- or even six-figure losses by year 20. The loan then becomes a very expensive grant.

It gets even more expensive for taxpayers when student borrowers take a "public service" job after graduation, thanks to a program that began in 2007. "Public servants" can get all of their remaining federal student-loan debt forgiven after only 10 years. This applies to government employees such as teachers and to workers at nonprofits.

It's too early to know for sure how this will affect student-borrower behavior, but you can guess. Here we have the federal government offering significant financial incentives to encourage young people to choose what the late Irving Kristol called the politically active "helping professions" over wealth-creating businesses. Go to Georgetown, borrow $100,000 from Uncle Sam, join the Sierra Club, wait a decade and the loan becomes a free lunch.

The larger picture is that the President is pushing hard to turn college into one more new entitlement, regardless of cost or course of study. He said in Denver that "college isn't just one of the best investments you can make in your future. It's one of the best investments America can make in our future."

So, he added, "we want you in school." The only question is "how do we make sure you are burdened with less debt?" His answer seems to be to give kids the money instead of loaning it to them. Along with his new plan to disguise grants as short-term debt, Mr. Obama also takes credit for doubling annual Pell grants since taking office to $36 billion.

Washington's rising subsidies for college are a big reason that tuition keeps rising faster than inflation. Tuition and fees increased 4.5% at private colleges last year and 8.3% at public ones, according to the College Board's latest data. Under Mr. Obama's plan, taxpayers will provide the subsidies that allow colleges to raise their prices even higher.

Recently, House Education and the Workforce Chairman John Kline (R-MN) spoke with the Wall Street Journal's James Freeman about the president's student loan plan. To watch a video of their conversation, click here.

Earlier today, House and Senate education leaders met to discuss next steps to replace No Child Left Behind. At this meeting, the members agreed to recommend Chairman John Kline to chair the conferenc...... READ MORE